Warren Buffett, George Soros, Bill Gates, Mikhail Prokhorov, Brad Klontz, Ray Dalio, Robert Kiyosaki… we have all heard these names at least once in our lives. But what do these stars all have in common, apart from fact that they have a lot of money?
It’s that they have acquired exceptional financial wisdom, which has made them seasoned investors. These stars have all had their ups and downs, but thanks to their financial wisdom, their names will always be remembered in history of finance.
In this article, you will learn what financial wisdom is? How can it help you manage your own and personal finances? We tell you all about it!
Financial wisdom definition
How to start saving money? How to start living debt-free? How do you allocate your money wisely?
Many people ask themselves these questions year after year, but do nothing to achieve desired path to financial freedom. Because in today’s reality, a person’s quality of life is directly related to their financial well-being. And this financial well-being cannot be achieved without financial wisdom. What is financial wisdom really?
Many thinkers and economists have had no shortage of words to define financial wisdom term. Nevertheless, one of most prominent definitions remains those of James Grant and John Maynard Keynes.
The former defines it, in his book, as “the ability to make good use of money, so that it serves as an instrument for the promotion of virtue and happiness”. The second, John Keynes, summed up, in his book, financial wisdom meaning in a short phrase.
Known for his work on financial wisdom, the economist et author defined the concept as “the art or skill of getting rich”. Taking these different meanings into account, financial wisdom can be said to be a combination of knowledge and skill that enables sound financial decisions to be made.
Of course, this combination of knowledge and skills must lead to a specific goal. And some would say that goal is financial freedom. Therefore, financial wisdom guides the way you manage your money. It is about understanding how money works and how to invest, save and pay off debt. Financial wisdom comes from understanding these simple truths.
The foundations of financial wisdom are
Financial wisdom has several foundations. And each foundation should lead to better help you manage your income with discipline.
Salary, business turnover, however you earn your money, with good financial wisdom you should know how to organize and manage that money to achieve your life goals.
In this sense, the first step in gaining financial wisdom is to learn money management basics. This includes knowing how much money you have or earn, how much debt you have, and how many savings you should have in each category.
Once you know where your money is going each month, it is time to start thinking about investing it wisely. As author, Robert Schiller, would say, “Investing means parting with your money today in order to get more of it in the future”.
On the other hand, investing wisely and sensibly will help your money to grow over time, which will contribute to financial wealth buildings.
To do this, here are basics for managing your personal finances:
Financial knowledge
You need to know budgeting and saving basics, how money works and how financial market works. You also need to understand your personal financial situation.
Financial skills
You need to know how to use your knowledge effectively to put it into practice by choosing where to invest your money and what kind of risk to take with it.
Financial motivation
You need to be motivated by a desire to succeed in your investment decisions and in your overall financial well-being. This helps you to consistently make good decisions on a day-to-day basis, not just when market is doing well or badly.
Financial wisdom basic principles
Like all disciplines, financial wisdom must be applied according to certain principles. These will help you make wise choices to build a comfortable nest egg for you and your family. And not only that!
The principles of financial wisdom will also help you preserve the value of your investments over time, so that they continue to grow, rather than lose value due to inflation or other factors. In summary, here are 5 key principles if you want to manage your money wisely:
Restraint
You can’t have everything in life, especially when you are striving for financial independence and freedom. Therefore, you have to make choices about what you want and need in life, including financial matters. No more compulsive buying! The best advice is to establish a monthly schedule (a good plan).
Knowledge of time value
Looking for right principles to acquire financial wisdom? Foremost, know that your time is much more valuable than money.
This means that you should spend less time on paid work and more time on other things that give you fulfillment and value. You should turn to tasks that will help improve your financial or professional situation. You can, therefore, use training courses that will help you to set up a passive income system (trading, marketing…).
Less spending, more saving
This can be considered financial wisdom essence. Saving money and saving is worthwhile if it will improve your life in long run. And that means spending less on things you want or need, while having more money available when you need it (such as down payments on houses).
Inflation and rising prices can be a barrier to saving money. However, with good management of your personal finances and careful spending, you can easily cope with any crisis.
Some economists suggest in books that a good rule of thumb for an individual is to spend no more than 30% of their income. The more savings you have, the less you will need to turn to bank loans. As Benjamin Franklin said, “An ounce of savings is better than a pound of loans.”
A good knowledge of finance basics
Financial literacy is important, but it is not a prerequisite for financial wisdom. However, it must be acknowledged that people who are financially literate have a great deal of financial wisdom. This is because they look at their situation logically and tend not to make rash decisions based on emotion or impulse.
Living within your means
We live in a world of consumption. And it must be recognized that sometimes temptations and especially the ease of obtaining consumer credit can be a brake on financial wisdom.
Resorting to debt is sometimes not ideal approach to living a financially wise life. So, it is more than important not to live beyond your means. If circumstances have caused you to incur debt, it is essential to start paying it off bit by bit.
Managing personal finances: how to manage money and finances wisely
According to star Robert Kiyosaki, it doesn’t matter how much you earn, it’s how you manage your money that counts. Good management of your money or income is financial wisdom culmination.
Once you have acquired financial wisdom, you are obliged to manage your money and wealth well. Here are some tips and methods for managing your finances:
Tracking income and expenses
It’s a proven fact, according to statistics, that people who start tracking their expenses automatically start spending 10-15% less on average. And they do this without any extra effort.
When you focus on your spending, you become more aware of every purchase. Same principle works with a food diary for people who want to get fit. By having a clear idea of when and how you spend money, you will unconsciously start to act smarter. And this is the mindset that financial wisdom advocates for good money management.
Budgeting and planning
Getting your finances in order is not just a matter of counting your income and expenses. It is important to understand how much money you need per month for different categories of needs and to plan these expenses in advance. Set up your budget categories based on your spending records over several months.
For good financial management, you can divide your expenses into many categories. These can include, for example:
- compulsory household expenses
- compulsory expenditure on food
- compulsory expenses for repaying loans and debts
- savings; recreation
- education
In this way, you will allocate your income so that you have enough for all essential categories. For better management of your finances, you can use envelopes for each category of expenditure. And if you don’t like cash, use an online bank account, it’s very convenient.
Setting financial goals
Setting and writing down goals is essential if you want your dreams to come true. So write down all your financial goals, from the smallest to the biggest, like saving for retirement.
After that, you can rank your goals according to how long you want to spend on them. For example, short term (up to six months), medium term (six months to two years) and long term (two years or more).
Then calculate how much you need to set aside for each goal each month to achieve it within time frame you have set. Then compare this amount to your income level. This will give you a clear idea of how much money you will need to earn to reach your financial goals, depending on your lifestyle.
Setting up savings
Once you have set your goals, you will obviously want to save as much as possible to get there faster. But be careful at this stage, because without financial wisdom your plans could fall through.
Note that financial wisdom does not necessarily mean that you deprive yourself of everything. On the contrary, financial wisdom even excludes austerity. And for good reason: extreme austerity is not for everyone. People usually get tired of excessive saving when it impinges on their well-being and their health.
So don’t try to buy everything that is cheapest, treat yourself to a little treat now and then. The secret of rational saving is to buy the best of what is available at the best price. And then, as you amass more money and move up to next level, you can buy the best of everything at your leisure.
Building up a stockpile
With what happened with Covid-19 pandemic crisis, importance of a personal emergency reserve has become even more apparent. And this emergency fund has several advantages in the context of financial wisdom.
Your financial airbag should be equal to the sum of your current expenses for 3 to 6 months. We recommend that you add this goal to your list and give it the highest priority.
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Conclusion financial wisdom
We all make great efforts to gather information about different financial concepts and rules to achieve financial freedom. Some of us are successful in managing our finances. However, most of us still do not know what to do with some personal financial matters. And this is where financial wisdom comes.
Indeed, there are many benefits to learning and applying financial wisdom. As you have seen, it helps you to better manage your personal finances, control your spending and make sound investment decisions. New management methods will allow you to make right choices and save our time, effort and money.